This may have been asked/answered already - maybe has to do with futures purchasing I don't know...
I live in a small town, only 5 or 6 gas stations. They get their deliveries one, maybe 2 times a week. Last 2 or 3 weeks the pricing goes up 2 times a day, every day.
If they purchased their gas at $X amount and sold it for $X amount on day-one, what would justify their increasing the same supply 4 or more times? I can't get my brain around the concept, maybe someone can help me?
The rates to sell the product you have is based on the price of future supply and right now the price of gasoline is very violatile, pardon the pun.
--put very simply, if you are a retailer, you sell the gas you have on hand at a price reflecting what it will cost to replace it--
The next time the supply truck comes rolling in the price is $Y.
If the seller hasn't been increasing the price at the pump how is he going to have the money to pay for the new supply?
What you are not thinking of is....how is the dealer going to be able to afford the next tanker load if prices to him have increased substantially?
I own a gas station and a little over a year ago I paid about $15,000.00 every night for a tanker load of gasoline. Now my load (9000 gallons) costs close to $27,000.00 every night. In a fast moving market how in the world is a dealer who only get one or two loads of gas a week going to be able to buy the next one....if he is not charging the going rate?
The dealer is making about eight to ten cents a gallon (gross). On Monday he gets a load but then he gets another load on Saturday which costs him 30 cents a gallon more. A load is 9000 gallons x .30 cents = $2700.00. If he sold every drop of that previous load before Saturday at the original price he made $900.00 profit....on "THAT" load. Now all of a sudden he has to pay an additional $2700.00 for the next load. Prescription for bankruptcy! If he does not increase his prices daily to account for the wholesale price increases along the the line....well, I'm sure you can now understand the problem.
A week ago my regular was selling at about $2.89 a gallon. Today it is $3.23 a gallon.Tomorrow it goes up another .02 cents. I pass on my increase penny for penny to the customer. I don't get a .05 cent increase and charge .07 to the customer. If I do not keep up with the daily pricing I'm in trouble. Usually this is not a major concern in a steady market.....but the dealer who only gets a load or two a week has to keep up on the daily pricing, otherwise he cannot afford his next load.
Don't know if this helps or not...but is the correct answer.
Ok, say you own a small store and sell widgets. You generally stock about 100 of them and sell them all each week. Your turnover is 100% each week, which means you have to buy 100 more for the next week. Got that?
Now, this week, you have 100 widgets on your shelf that cost you $1.00 each to buy, including shipping, etc. Since you are an astute business person, you keep a sharp eye on the costs of widgets, and you are in contact with your distributor all the time. Got that?
Now, this week you have just put your 100 widgets on the shelf, in anticipation of selling all 100 of them again, like last week. However, today you get a call from your distributor, who tells you that the price of widgets (your cost) is now 10% higher. In anticipation of having to buy more widgets next week at a 10% premium, if you're smart, you'll mark up your existing widgets so you'll make the same margin when you have to buy new stock next week.
Later that day, your distributor calls and says that new widgets will now cost you 15% more than before because of his costs going up-- for whatever reason. So if you are going to keep your margin and make any profit, you had better mark up your existing widget stocks in anticipation of having to purchase next weeks stock at a 15% premium over previous cost.
You get through the day without another phone call, but the next morning your distributor calls again and says that your normal widgets will now cost 20% more than before so you better plan on it for your next order. Back you go to your widget shelf and mark up your existing stock, which you purchased at the normal price prior to these price increases.
You don't have any more money invested in the current stock of widgets, but in order to buy next weeks shipment, you're going to have to pay 20% more than you did before. If you don't mark up the current stock, then you won't have enough money to buy new stock. Or a smaller profit margin, at least. See?
'Course, your distributor could call you and say that your cost is going to be 10% less than you have been paying, and that would make you very happy. And next week, your cost would be 10% less, so you could make additional profit. Except that the widget store across the street gets the same call from their distributor, and in order to compete with you, they lower their price, because now it will cost them less. So you will be under pressure to lower your prices to compete.
It works the same way, up and down, and with a fast moving commodity and fast moving prices breaking several times daily, you will be spending a lot of time on the phone with your distributor and marking up/down your widget prices or you won't be in business long- for one reason or another.
I hope this illustrates how quick moving prices requires resellers to change prices. Back in the late '80's when the price of computer RAM was fluctuating by the minute and supply was very short, we would be getting price changes several times a day. If we didn't reprice what we had in stock in anticipation of what it would cost us to replace our stock, we would have lost money big time... which is what we mostly did, no matter how hard we tried. The guys making the money were the ones who had the contacts and who bought RAM by the carload, and then sold it to everyone else. Like they say, it takes money to make money. Also, good timing, excellent communications, a lot of luck and perfect planning.
You operate a gas station.
You own a refined commodity. It turns over rapidly in your business. Every gallon you sell must be replaced by a new gallon or your customers go away. The commodity you own increases in value on world markets. Are you going to give yours away at the pre-increased prices knowing that you have to replace it at much higher prices or are you going to mark your inventory to market knowing quite well that you can sell it easily? If you sell it at the price you bought it for you have to replace it at much higher prices.
You aren't a fool. The gas you have is worth more than it was when you bought it but you still have to replace it and the cost has gone up.
Even worse, your gas sales have very little to do with your profit. You make your money from the convenience store. So you aren't an expert on gas or oil futures you just want to attract as much business as you can and you simply keep your prices competitive. But to keep customers coming you have to have gas to sell. THAT is what they stop for. So you have to have enough money in gas sales to replace the inventory. The gasoline on world markets goes to the highest bidder. You'd better get yours - so your company has a futures trader in the pits making sure you do.
How does he do it? He buys, even at higher prices, and you pass those prices on to your customer even though it isn't a big profit to you. You just want the traffic.
OIL IS A COMMODITY FOLKS. It isn't a car.
Diego1618 wrote:The [retail] dealer is making about eight to ten cents a gallon (gross). On Monday he gets a load but then he gets another load on Saturday which costs him 30 cents a gallon more. A load is 9000 gallons x .30 cents = $2700.00. If he sold every drop of that previous load before Saturday at the original price he made $900.00 profit....on "THAT" load. Now all of a sudden he has to pay an additional $2700.00 for the next load. Prescription for bankruptcy! If he does not increase his prices daily to account for the wholesale price increases along the the line....well, I'm sure you can now understand the problem.
Reason one. They have to make enough money from the gas in their tanks today to pay for the next delivery.
Reason two. You don't stop buying it when the price goes up -- i.e. you are willing to pay a higher price so they are willing to charge it. They do the exact same thing you would do in your business.